Bill Newman: Get Over Your Fear and Go for Black Gold in ArgentinaInterview

Source: Peter Byrne of The Energy Report (5/8/14)

It's been a long time since the Repsol fiasco in Argentina, and the oil-rich nation has been making steady efforts to encourage foreign investment in its energy sector. Bill Newman, vice president of international oil and gas with Mackie Research Capital, insists investors should focus less on political risk and more on the world-class Vaca Muerta shale play. In this interview with The Energy Report, Newman names oil and gas majors and junior explorers making progress, and recommends a few names that are taking advantage of Argentina's production incentives.

The Energy Report:
Let's talk about the macro-economic picture for Argentina in terms of energy. What is the story there with the country's growing deficit, the devaluation
of the peso and the reliance on energy imports?

Bill Newman:
Production of both oil and natural gas in Argentina has been declining for years. At the same time, demand has been increasing. This is accelerating
Argentina's energy deficit. The Argentina government understands that in order to slow production declines and eventually return to energy self
sufficiency, a substantial increase in investment will be required, and a large portion of that capital will have to come from foreign investment. The bottom
line is that the government knows it needs to attract capital, and that could translate into modest improvements to the energy sector in order to promote
that investment.

In January 2014, we saw a rapid devaluation of the peso. The peso has subsequently stabilized but there is still some risk of further
devaluation. Oil and gas is priced in U.S. dollars, which somewhat mitigates the impact of the falling peso. Producers could have lower operational costs
in the short term, as most expenses are paid in pesos. Inflation remains a problem in Argentina, and the government is actively taking measures to prevent
social unrest by negotiating with unions for higher wages to compensate for the weaker peso. But the government understands that increased foreign
investment is one tool that could help to resolve the issue.

TER:
Is Argentina increasingly attractive to foreign investors?

BN:
It's no surprise that the expropriation of Repsol's 51% holding in Yacimientos Petrolíferos Fiscales (YPF:NYSE) in April 2012 jolted investor confidence. But ever
since then, the government has been trying to repair the damage by introducing new incentives to promote investment by energy companies. Argentina has also
been working toward improving its reputation on the international stage through negotiations with the debt holdouts, and successfully negotiated a
compensation settlement with Repsol (REP:MC) for the expropriated shares. This really is a
complete turnaround from the direction the government was taking in early 2012. We think these efforts have reduced the perceived investment risk of
Argentina, and that is starting to be reflected by increased investment. If Argentina holds the course, investors should start to focus less on political
risk and focus more on the world-class Vaca Muerta shale play.

TER:
What is the significance of the YPF $5 billion ($5B) settlement with Repsol?

BN:
A large portion of the land that is prospective in the Neuquén Basin of the Vaca Muerta is held by YPF, so major oil companies looking for a meaningful
position in the play might have to complete a deal with YPF. Before the settlement, most companies that were hoping to joint venture with YPF put their
plans on hold. The $5B settlement is a signal to the market that the government is serious about repairing its reputation on the world stage, and the move
should open the door for new joint ventures in 2014. With the improving outlook, many companies have announced expanded plans for Argentina. Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) plans to
invest $500 million ($500M) into the unconventional shale plays in Argentina in 2014, which is approximately three times the amount the company invested in
2013. Also, Petrobras no longer has its Argentina subsidiary up for sale and instead now expects to make a large investment in Argentina this year.

BN:
The $1.6B investment is the second stage of the joint venture between Chevron and YPF to develop the Vaca Muerta shale play on the Loma Campana block. The
first phase, which was a $1.24B investment, was completed early this year, and production from the Vaca Muerta shale is now about 20,000 barrels per day
(20,000 bbl/d). The second investment includes 170 wells, and longer-term plans could include up to 1,500 wells and an increase in production up to 50,000
bbl/d and 100 million cubic feet per day (100 MMcf/d) of natural gas. We see the second Chevron/YPF investment as another vote of confidence for the Vaca
Muerta shale play in Argentina.

TER:
Who is drilling in the Vaca Muerta play, and with what kind of success?

Americas Petrogas holds a very large land base in the Neuquén Basin, which the company acquired many years before the shale play took off. There has been a
lot of activity by the supermajors on blocks directly offsetting its Los Toldos blocks. In April 2014, Shell farmed into two blocks held by Total, which
are located near Americas Petrogas' Los Toldos I block. Rumors are Shell paid approximately $6,000/acre. Also in April, YPF and Chevron
announced another $140 million joint venture to drill nine exploration shale wells on the Narambuena block. Chevron also plans to drill four wells targeting the Vaca Muerta shale on the El Trapial block. A lot of money is being spent on lands very near to America
Petrogas' lands, which could help derisk the play. In September of last year, Americas Petrogas announced a formal strategic review process to
attract new joint venture partners or buyers, and we think the $5B settlement to Repsol and the increase exploration activity can only help with the
process.

Madalena has been a very active driller in the Neuquén Basin. The company recently drilled two Vaca Muerta exploration wells on the Coiron Amargo block,
which will be fracture stimulated and tested in Q2/14. The Coiron Amargo block is located within the prime Vaca Muerta shale oil window and just to the
east of the Loma Campana block, where Chevron and YPF are drilling. Madalena is also having a lot of success by drilling horizontal wells to achieve high
flow rates from the conventional Sierras Blancas formation. So far the company has discovered six Sierras Blancas light oil pools on the Coiron Amargo
block. But Madalena has shown the best way to develop the play is with unstimulated horizontal wells. In January 2014, Madalena announced that the
CAN.xr-2(h) horizontal well tested up to 2,235 barrels of oil equivalent (2,235 boe/d), and in April the CAN-15(h) well, a second horizontal well targeting
the largest Sierras Blancas structure, tested at 1,945 boe/d from only a portion of the horizontal leg. The company plans to drill three more horizontal
Sierras Blancas wells this year, which should boost its production in Argentina. Madalena now has two high-impact plays to appraise on the Coiron Amargo
block.

Near the Coiron Amargo block, Madalena holds a 90% working interest in the Curamhueleblock. The region could be the next
hot area for shale exploration. As we mentioned, Chevron plans to drill four wells targeting the Vaca Muerta shale on its El Trapial block, which is
directly adjacent to Madalena's Curamhueleblock. Madalena also sees a lot of potential in the Lower Agrio formation,
which is another shale play on the Curamhuele block. With the success of the Sierras Blancas wells and all the shale wells that are scheduled to be tested,
we think Madalena could add a lot of value in 2014.

TER:
How are Crown Point's financial fundamentals looking this year, in light of its operational story?

BN:
Crown Point's current focus is on growing its conventional natural gas production through a low-risk drilling program in Tierra del Fuego, which is located
on the southern tip of Argentina. The company also has conventional and shale oil potential on its 100%-owned Cerro de Los Leones block in the Neuquén
Basin. Crown Point didn't drill any wells last year because it was waiting for governmental approval for an extension of Tierra del Fuego concessions,
which it has received. Crown Point just started a 10-well drilling program consisting of eight development wells and two exploration wells, so we expect
production to grow from approximately 1,600 boe/d to over 2,000 boe/d by year-end. Natural gas prices have been steadily rising in Argentina, which has
really improved the economics of the play. Also, last year the government introduced a new natural gas price incentive program that, in effect, sets the
natural gas price to $7.50/million British thermal units for production above a baseline. Crown Point has applied for the program, so if the company is
approved, it could have a big impact on cash flow. Investment in Tierra del Fuego is really picking up, and a few weeks ago YPF announced plans to invest
$700 million ($700M) in Tierra del Fuego over a 10-year period.

One other near-term catalyst is that Crown Point is currently testing the La Hoyada x-1 exploration well on the Cerro de Los Leones block, which it drilled
earlier this year. We are hoping for a test of over 200 bbl/d.

TER:
Are there any other energy firms that you have your eye on in Argentina?

Bill Newman
is vice president of international oil and gas with Mackie Research Capital Corp. He has been an energy analyst for 16 years. Bill holds a Bachelor of
Commerce from the University of Calgary and has a CFA designation.

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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an
independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Madalena Energy Inc. and Royal Dutch Shell Plc. Streetwise
Reports does not accept stock in exchange for its services.
3) Bill Newman: I own, or my family owns, shares of the following companies mentioned in this interview: Crown Point Energy Inc. I personally am, or my
family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies
mentioned in this interview: Within the last three years, Mackie Research Capital has managed or co-managed an offering of securities for, and received
compensation for investment banking and related services from Americas Petrogas Inc. and Madalena Energy Inc. I visited the Buenos Aires offices of
Americas Petrogas Inc. and the offices of Madalena Energy Inc. on January 27, 2012. All expenses were paid for by Mackie Research Capital Corporation. I
was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the
opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
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